3 Tax Facts Every Social Security Retiree Must Know

As a retiree, chances are good you’ll rely on Social Security benefits to help fund your lifestyle. Since they’ll be an important source of income, it’s important to know how much money they’ll provide.

That doesn’t just mean knowing the amount of your standard benefit, or how your age when you claim benefits affects your income. You also need to understand the tax rules that determine how much of your checks you actually get to keep.

Here are three key things you need to know about what taxes you may owe.

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1. Some of your Social Security benefits could be subject to federal tax

While the federal government didn’t tax benefits in the past, that hasn’t been the case since 1983. Now those with higher incomes could see up to 85% of their benefits subject to federal tax. The table below shows the threshold at which your benefit becomes taxable, based on your countable income.

This % of benefits may be taxed For individual filers with incomes of: For married joint filers with incomes of:
0% Less than $25,000 per year Less than $32,000 per year
Up to 50% $25,000 to $34,000 per year $32,000 to $44,000 per year
Up to 85% More than $34,000 per year More than $44,000 per year

Table source: Social Security Administration

The Social Security Administration sends you a Social Security Benefit Statement (Form SSA-1099) to provide the information you need, both to determine if your benefits are taxable and to include on your tax return.

If you will owe federal taxes on your benefits, you can choose to have the amount withheld from your checks. If you don’t, you may have to make quarterly estimated tax payments to avoid being subject to penalties that apply if you don’t pay tax as income comes in.

2. Not all income is “countable” in determining if benefits will be taxed

You’ll notice above that the threshold at which your benefit becomes subject to tax is based on “countable” income. Countable income doesn’t necessarily mean all the income you receive. It means:

  • 1/2 your Social Security benefit
  • All of your taxable income
  • Some non-taxable income, such as interest from MUNI bonds

You’ll need to add up the income from these sources to determine if you’ve reached the threshold at which you’ll owe the IRS.

Because not all income counts, it’s possible to make retirement plans to avoid owing taxes on your benefits. If you invest in a Roth 401(k) or Roth IRA instead of a traditional one, you can take tax-free distributions as a retiree so none of the money you withdraw will count toward determining if you owe tax on Social Security income.

For current retirees, you may also be able to do a Roth conversion if you don’t want to pay taxes on benefits. However, converting a traditional account to a Roth has tax consequences: It could make more of your benefits taxable in the year of the conversion, and there are complex rules for when and how the money in the converted account can be accessed — so this approach may not work for everyone, and you should understand the IRS requirements before you try it.

3. Some states tax Social Security

It’s not just Uncle Sam that may want a piece of your Social Security check. There are currently 13 states that also tax benefits (although this will soon be 12). They include:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

The rules for when benefits are taxed differ by state, but if you find your local government is taking a portion of your Social Security income, you may decide to relocate as a retiree.

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